Draft Rules to Nullify Retrospective Tax on Indirect Transfer of Shares
Background: Amendment to Indirect Transfer Provisions
The Government passed the Taxation Laws (Amendment) Act, 2021 (TLAA) in Parliament on 13 August 2021 to amend the indirect transfer provisions of the Income Tax Act, 1961. The amendment makes these provisions prospective in nature, i.e., applicable from 28 May 2012 onwards. The TLAA also stipulates certain conditions to be fulfilled by taxpayers to be eligible for relief, including the filing of undertakings.
To operationalize these amendments, draft rules have been proposed outlining:
- Conditions to be fulfilled
- Process to be followed
- Compliance requirements for taxpayers
Process to be Followed
The draft rules prescribe a step-by-step compliance mechanism for taxpayers (Declarants):
Step 1: Filing of Undertaking
- The Declarant must furnish Form 1
- Timeline: Within 45 days from publication of rules in the official gazette
- Submitted to: Jurisdictional Principal Commissioner / Commissioner (Designated Officer)
Step 2: Review by Designated Officer
- The Designated Officer will:
- Accept the undertaking and issue a certificate in Form 2, or
- Reject the undertaking after providing an opportunity of being heard
- Timeline: Within 15 days from receipt of Form 1
Step 3: Withdrawal of Proceedings
- The Declarant must:
- Withdraw / discontinue / waive ongoing proceedings
- Submit intimation in Form 3
- Timeline: Within 60 days from receipt of Form 2
Step 4: Direction by Designated Officer
- The Designated Officer will issue directions in Form 4 to the Tax Officer (TO):
- Grant relief, or
- Reject relief (after hearing the Declarant)
- Timeline:
- Within 30 days of Form 3, or
- Within 30 days of Form 2 (if applicable)
Step 5: Action by Tax Officer
The tax officer must, within 30 days:
- Give effect to the directions
- Pass an order
- Issue refund (if applicable)
- Revoke attachments (if any)
- Withdraw departmental appeals and proceedings
Undertakings to be Furnished
The draft rules require specific undertakings from:
- Declarant
- Interested Party (if any)
Where Proceedings are Pending
The Declarant and Interested Party must undertake the following:
- To irrevocably withdraw and discontinue proceedings
- To waive all rights, claims, demands, costs, or liabilities related to the tax dispute
Where No Proceedings are Pending
The Declarant and Interested Party must undertake that:
- No proceedings have been initiated and will not be initiated, or
- Any initiated proceedings have been irrevocably withdrawn
Other Significant Aspects
The draft rules also prescribe additional obligations:
- The Declarant must:
- Indemnify and hold harmless the Government of India and its affiliates
- Cover any claims brought by third parties (e.g., shareholders, beneficial owners)
- A press release must be issued announcing the undertaking
- Any disputes arising from forms, orders, or directions will be governed by Indian law
Comments
The draft rules provide detailed clarity on procedural and compliance requirements, including:
- Structured undertakings
- Defined timelines
- Stepwise execution framework
This ensures:
- Greater certainty for taxpayers
- Clear administrative guidance for authorities
- Time-bound resolution of legacy tax disputes
For businesses navigating such regulatory changes, it becomes essential to align with broader taxation advisory services and structured direct tax advisory services to ensure compliance and risk mitigation.
Additional Resources
To further understand the broader framework of direct tax compliance, dispute resolution, and regulatory changes, the following resources provide relevant context: